5 Things to Know About Umbrella Insurance

1. WITHOUT IT, YOU COULD LOSE EVERYTHING

If you cause a car accident and the other driver sues, your auto insurance covers you up to your personal liability limit, which is likely between $100,000 and $300,000. Same goes for your homeowners insurance if the mailman slips on your steps. An umbrella liability policy pays for settlements and legal fees above your limit. Without this insurance, your wages and assets are at stake (through in some states, retirement funds, pensions, and your home are excluded).

2. LIABILITY RISKS ARE EVERYWHERE

"More than 80% of umbrella losses are auto-related," says Ed Charlebois of Travelers Insurance. Even if you're the safest driver, your teen probably isn't. Redoing your kitchen? Your general contractor may not adequately vet subcontractors for workers' comp or liability. Host a lot of parties? If a guest gets into a drunken-driving accident, the victim can come after you. Got a pool, hot tub, or boat? Employ a nanny or a housecleaner? Then you have risk factors.

3. YOU'RE INSURING AGAINST THE WORST - CASE SCENARIO

The median jury award for vehicular accident liability cases is $21,000, found Jury Verdict Research. But the average is $306,000 - so some settlements are much, much higher. That's why many financial planners say an umbrella policy is a must for those with significant net worth. "Insurance is there to stop an accident from being a life-changing event financially," says Redondo Beach, California, CFP Scot Leonard.

4. A LOT OF COVERAGE COSTS VERY LITTLE

A typical homeowner with two cars can get a $1 million policy for $250 to $400 a year, reports the Insurance Information Institute. "My rule of thumb is for clients to have coverage equal to one to two times their exposed net worth," says Franklin, Michigan, financial planner Bert Whitehead. (By "exposed," he means assets vulnerable in your state.) That way your are not just shielding your money, but ensuring that the insurer will mount an aggressive defense.

5. YOU MANY NEED TO JUGGLE COVERAGE FIRST

Umbrella insurance usually requires specific liability limits on the policies it's piggybacking - such as $300,000 per person on auto and $300,000 on home. So you may have to boost your coverage. Plus, some carriers extend umbrella only over policies they have issued, says Jim Kuryak of Niagara National Insurance. On the upside, bundling with one insurer can offset the added cost; it can shave as much as 20% off home and auto premiums.